Why life insurance premiums are getting more expensive every year

Are you considering purchasing life insurance?

Before committing to life insurance, it’s important to understand how your new policy’s premium increases are determined.

Risk benefits may be payable in the event of death, disability or serious illness. Ideally, each benefit should be calculated and cost separately, as different conditions and indexation / amortization (payback time) rates apply from a financial planning perspective.

If one is to maintain a traditional policy for life, it must be affordable both now and for the foreseeable future. Various factors can influence your initial premium, and these include, but are not limited to, your age, health, occupation, and smoking status.

For this discussion, we’re going to look at the engine of traditional policy: the premium models built by the actuaries of the insurance company. Conventional wisdom dictates that you choose a certain amount of life insurance coverage that increases over time with a corresponding increase in premiums. There are two premium models that determine future premiums: progressive and mandatory premiums.

Level bonus

A constant premium applies throughout the life of the contract for the same amount of initial coverage. This premium model is designed so that premiums remain uniform throughout the term of the contract, but is only guaranteed for a period of between 15 and 20 years. If you increase coverage annually, premiums will also increase proportionately. If you stop taking annual increases in coverage, premiums will remain stable throughout.

Mandatory increasing premiums

A mandatory increasing premium starts out cheaper than a level premium at the start of the contract, but then has mandatory annual increases for the initial coverage purchased. The premium increases as it compounds each year, but the coverage remains the same. There are many types of mandatory increase coverage models, such as a fixed percentage increase, age increase, step increase, and a combination of these. (This latter increase is not offered by all companies.) If you increase coverage annually, premiums will increase based on a mandatory increase. Let’s compare the bonus models using a real example.

Male, 35, non-smoker. Quoted by a no-frills, fully underwritten insurer. R10 million death cover and R10 million accelerated disability insurance up to age 65. (Accelerated disability means that if the man has a R10 million disability claim, life coverage will disappear).

Here is a projected comparison of future premiums to help him choose between a level premium and a mandatory 5% increasing premium:

Understanding the shelter fund

In the first seven years, the difference between the level and the 5% progressive pattern could theoretically be invested in unit trusts at a projected rate of 8% so that it reaches a surplus in the eighth year of R70 106 and the increased mandatory premium becomes more expensive. than level premiums, they can be paid from the shelter fund.

In year 19, the shelter fund will have been exhausted and the cost difference will have to be met from its budget, which is the problem we are addressing.

The 35-year-old in this example would then be 55. Disability coverage would cease at age 65 and premiums for life coverage would then be reduced to R1 615 which would be payable for life on the level plan and R4,987 on the 5% Escalade plan.

How to choose between the two premium models?

You should buy the coverage you need when you have dependents and few assets. If that means you have to use the first savings generated by a mandatory premium model, you should know that you will have higher premiums in the future. Your future pay increases will likely be over 5%, so in fact the bonus just keeps pace with inflation. In the example above, the coverage has been kept at a constant level and the effect of annual increases in coverage on both a progressive and mandatory premium basis should be considered and illustrated by your financial advisor.

Since you need to devote at least 15% of your monthly income to building an emergency fund and long-term investments, you should achieve a good balance between risk and capital expenditure.

Expenditure on risk coverage should be limited in favor of increased investment expenditure.

If you want a fixed, predictable insurance expense within your monthly budget, have an emergency fund, and are investing enough for the long term, then the tier premium model is for you.

Things to discuss with your financial planner:

· How are the premiums and benefits projected for your current policies? Could you pay less for your coverage and invest more? Consider separately assessing financial needs separately, for example by reducing term coverage for a mortgage bond and increasing life coverage for living expenses.

· What can you do to avoid large increases in your policies? Your situation may have changed since you purchased your policy which may entitle you to lower premiums by being re-purchased, for example you quit smoking, lost weight, changed careers, spent less time traveling , you are married and may be eligible to use your spouse’s rating for your coverage.

You shouldn’t plan to pay huge sums for life insurance policies after retirement. The central idea of ​​personal financial planning is to build up capital that will provide you with the passive income you need.

· When you don’t have enough assets, insurance provides personal capital. By the time you want to retire, you should have accumulated enough investments to generate the required income. Some products and insurers make you pay for life and disability insurance long after retirement. The costs and benefits of it must be carefully considered and cash flow projections must be made to understand the long term premium commitment.

Some companies encourage you to have your life insurance policies and retirement annuities with them or to have loyalty programs that are evaluated separately, with the understanding that you will be financially rewarded if you improve your health. This is a great idea, but if you don’t engage in the loyalty program and intend to, you may be paying too much for the base product and wasting money on the program. loyalty.

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